IRS Random Selection of 500 Exempt Organizations for Employment Tax Audits

In 2010, the Internal Revenue Service (IRS) will randomly select approximately 500 exempt organizations for examination as the Exempt Organizations (EO) unit at the Service participates for the first time in the agency-wide National Research Program, with employment taxation as the focus. According to Sarah Hall Ingram, commissioner of the IRS Tax-Exempt and Government Entities Division, exempt organizations employ one in five U.S. workers, and employment tax has not been looked at recently enough in terms of a statistically valid research databank. Agency wide, IRS examination agents will be trained to ensure they all will be searching for the same information. The findings then will be analyzed by the IRS National Research Office. In addition to exempt organization exams, 90 federal, state, and local governments also will be examined for the study. Please attend Bricker & Eckler’s Nonprofit Advocate Institute on February 3, 2010, for more information on employment tax audits.

Charitable Spending

The IRS’s EO 2010 work plan will include a long-term charitable spending study to learn more about the sources and uses of funds in the charitable sector and their impact on accomplishment of charitable purposes. According to Lois Lerner, director of EO, the first stage of the charitable spending project is expected to focus on organizations with unusual fund-raising levels and organizations that report unrelated trade or business activity and relatively low levels of program service expenditures. The project will examine public contributions, grants, revenues from related or unrelated trades or businesses, types and amounts of direct and indirect unrelated business income expenses, officer compensation, fund¬raising expenses, and program service activities, and it will examine the effect each has on funds available for charitable spending.

Colleges and Universities

The IRS intends to release a report on colleges and universities in which it will share information received from about 400 public and private educational institutions that responded to an involved compliance check questionnaire sent in 2008. EO started exams of higher education institutions in August 2009, focusing on compensation and unrelated business income tax. The IRS will issue a basic report on its findings from the questionnaire and then will follow up with a report on the outcome of examinations that resulted from the study. Additional questions are expected related to the rebuttable presumption permitted to substantiate the reasonableness of salaries of executives using comparable salaries from positions at other organizations. The IRS also will look at how the initial contract exception is used to affect the setting of salaries, whereby the rules on negotiations over salary are lessened if an institution is in its first contract with a prospective hire.

Political Activity Compliance

Although the 2008 Political Activity Compliance Initiative (PACI) report is not yet out, EO reports that the types of allegations over the past three election cycles appear to be very similar. Political intervention allegations often are unsuccessful, and there frequently is confusion between lobbying activity and political activity. The EO unit uses a PACI referral committee and a project coordinator to investigate claims of illegal politicking. Although the PACI report from 2008, which was expected in March 2009, has been delayed and timing of its release is uncertain, PACI 2010 now has begun. A related project involving proposed regulations that will determine who at the IRS can initiate a church tax inquiry also is moving forward, whereby the IRS proposes to make the director of exempt organizations the person responsible for determining if a church tax inquiry should be commenced.

Governance

The IRS recently released a governance check sheet that examiners will use to help determine if there is a correlation between good governance practices and compliance, and to capture data about governance practices and the related internal controls of organizations being examined. While the check sheets will not relate to a particular organization under examination at the time, information from them will be plugged into the examination stream in the future.

Academic Initiative

Customer Education and Outreach in EO is developing a new academic program initiative to reach out directly to academic institutions for help in training the nonprofit leaders of the future. The IRS invited comments in Announcement 2009-26 and asked for help in developing a curriculum that would help to train leaders not just on how to raise and spend money for charities, but be aware of the IRS rules and regulations from the beginning of their careers as nonprofit leaders. The response was much better than expected, and 17 academic institutions expressed an interest in partnering with the IRS to promote the education of exempt organization tax law.

Form 990-N

This will be the first year organizations that have not filed any type of the Form 990 for three consecutive years will start to have their exempt status revoked, and the process will begin in May or June. Small tax-exempt organizations whose annual gross receipts are normally $25,000 or less may be required to electronically submit Form 990-N, also known as the e-Postcard, unless they choose to file a complete Form 990 or Form 990-EZ. An organization that fails to file the required e-Postcards (or Forms 990 or 990-EZ) for three consecutive years will automatically lose its tax-exempt status, although the revocation of the organization’s tax-exempt status will not take place until the filing due date of the third year. The e-Postcard is due every year by day 15 of the fifth month after the close of the tax year. For example, if the organization’s tax year ended on December 31, 2009, the e-Postcard is due May 15, 2010.